The
Essential Insurance Act limited insurers to a maximum of twenty different
territorial rates. It also required that the base rate in any territory be no
less than 90 percent of the base rate in an immediately adjacent territory and
that the smallest territorial base rate be no less than 45 percent of the
highest territorial base rate.
[46] The objective of these restrictions was to
reduce differences in rates across territories. The restrictions were based on
the assumption that an insurer would write roughly the same proportion of
drivers in different territories so that any subsidy to high cost territories
would be spread broadly by insurers among low cost areas. However, as claim
costs increased in Detroit, serious market dislocations occurred.
[47] Market
concentration increased in Detroit, and insurers with large -volume
in Detroit found it difficult to compete outstate with insurers that had a
minimal presence in Detroit without experiencing large operating losses in
Detroit. Absent change in the law, it is likely that the market would have
become increasingly bifurcated over time between Detroit writers and outstate
writers.
[48]

The 1986 Reform Act.
The legislature adopted a bill in 1985 that would have substantially reduced
restrictions on territorial rating. Then Governor Blanchard vetoed this bill,
which had been opposed by the Insurance Bureau for possibly allowing large rate
increases in Detroit. A modified bill was enacted that took effect in early
1986. This law suspended the 45 and 90 percent constraints on territorial
rating, allowed insurers to raise rates in Detroit to the average level of the
top five insurers, and restricted annual rate increases in Detroit to four
percent plus the percentage change in the Consumer Price Index. The law also
allowed insurers to redefine territories in Detroit. A maximum of six
territories in Detroit could be used, and the weighted-average rate of any new
territories could not exceed the weighted-average of previous territories. The
law also allowed insurers beginning in February 1988 to exercise a one-time
election to limit annual rate increases in Detroit to the percentage increase
outside of Detroit, as opposed to remaining subject to the percent change in the
CPI plus 4 percent limit. According to a sunset provision, the Essential
Insurance Act's restrictions on territorial rating will again apply in July,
1991 absent legislative action.

The
1986 Reform Act also contained a number of provisions designed to reduce auto
thefts. An Automobile Theft Prevention Authority was established. Insurers were
required to establish premium discount plans for the installation of auto theft
prevention devices. Provisions were also included that required insurers to
verify the existence of an auto under certain conditions, to require that thefts be reported to police in order for claims
to be paid, and to allow insurers to impose a $500 deductible or a 10 percent
co-payment if the auto was stolen while unattended with the keys in the
vehicle.
[49] These changes are likely to have reduced auto
thefts.
[50]

Territorial rating remains
subject to considerable controversy in Michigan. The focus of the debate
continues to be high rates in Detroit. The NAACP has threatened to sue insurers
for unfair discrimination. Territorial boundaries are again being criticized as
arbitrary and unfair. In addition, it is argued that high rates in Detroit
primarily are caused by inadequate competition. A bill has been introduced in
the legislature that would eliminate territorial rating and, if necessary, force
insurers to write coverage in Detroit.
[51]

The Insurance Bureau's
1989 Report. The Michigan Insurance
Bureau recently released a report on the effects of the 1986 Reform Act.
[52] The
report argues that insurers with large market shares in Detroit did not become
more competitive outside of Detroit after the law took effect. While it presents
evidence that rates for a number of insurers increased more rapidly in the
Detroit area than the remainder of the state since 1986, it does not consider
the possibility that this result would be expected if the previous territorial
restrictions had produced inadequate rates in Detroit (or that it possibly could
be due to more rapid growth in expected claim costs for certain coverages in
Detroit). It presents evidence that insurers increased their number of
territorial base rates and that rate differences between territories often
exceeded those that would have been permitted by the previous 45 and 90 percent
rules. The report illustrates substantial diversity in territorial boundaries
and rate factors across insurers, but it does not recognize that such diversity
is consistent with competition and that it will tend to smooth premium
differences between adjacent regions. Instead, the report argues that
territorial rating is largely arbitrary and subjective.

The report argues that the
Detroit market is not competitive because it is highly concentrated, because a
number of geographical areas (as defined by U.S. postal zip codes) have very few
insurance agents, and because 16 percent of Detroit exposures (most of which
were eligible for coverage in the voluntary market) were insured in the MAIPF
(also see note 54 infra). The discussion of market concentration does not
consider that the large number of auto insurers in Michigan could readily expand
their writings in Detroit if rates were
excessive, [53] The report notes that Insurance Bureau data providing addresses of agents
did not indicate whether they were for the agent's business or residence. It
nonetheless interprets the addresses as though they all indicate place of
business. The analysis will be distorted to the extent that any agents who gave
residential addresses do not live in the same area that their businesses are
located.

The
report argues that the large market share of the MAIPF in Detroit does not
reflect MAIPF rates that are competitive with the voluntary market. However, the
data shown for a young male driver in the Detroit area indicate that MAIPF rates
were competitive.
[54] The fact that MAIPF rates may not be among the lowest for
certain drivers in or outside of Detroit is not relevant to inferences about.
whether drivers insured in the MAIPF received rates that were competitive in the
voluntary market. The appropriate question to ask is how MAIPF rates compare to
those in the voluntary market for Detroit drivers Actually insured in the
MAIPF. The report did not pose or answer this question.

The
1989 report by the Insurance Bureau almost completely ignores that loss costs
are higher in the Detroit area than in the remainder of the state. Exhibit 18
(p. 102) illustrates higher losses in Detroit, but the report argues that
drivers in the Detroit area pay more than their fair share for coverage because
the loss ratio (ratio of incurred losses to earned premiums) for all coverages
in the Detroit area in 1987 was less than the statewide loss ratio (58.6 percent
versus 64.1 percent). This comparison does not consider that the loss ratio that
would allow insurers to break even from writing coverage will depend on numerous
factors that could vary between Detroit and the rest of the state, such as
differences in underwriting expenses associated with different marketing systems
and differences in the mix of business between liability, personal injury
protection, collision, and comprehensive coverage. [55] Even if this comparison were appropriate, it
would not support rate reductions for the two regions in Detroit (inner and
middle metro) with much higher premiums per vehicle in 1987 than the remaining
regions shown for the Detroit area. These two regions had loss ratios that were
approximately equal to the statewide loss ratio (see Exhibit 18, p. 102).

In order to address the
perceived deficiencies in territorial rating, the report proposes that rating
territories be (p. 112) "no smaller than a county or a Metropolitan Statistical
Area, whichever is larger". In an attempt to prevent market dislocations that
occurred under the prior restrictions on territorial rating, it also proposes an
assigned risk procedure in which persons in the MAIPF that satisfied the
Essential Insurance Act's eligibility rules would be assigned to (p. 113)
"voluntary market insurers in inverse proportion to their presence in urban
markets". Each insurer also would be required to have a statewide marketing plan
and to have a toll free number to provide persons with rating information, to
take applications, and to refer persons to agents.
[56]

The Insurance Bureau's
proposals would create significant cross-subsidies and is thus subject to the
drawbacks that were discussed earlier.
[57] As was the case in 1977, the
Insurance Bureau largely attributes affordability problems to insurer
underwriting and rate classification. The analysis and conclusions are
inconsistent with the fact that rates are high in Detroit because claim costs
are high. If subsidies to certain areas of Detroit are in the public interest,
they should be able to withstand public scrutiny. The legislature should only
undertake such action as a last resort after a full debate of the issues. If the
motivation for subsidies is to reduce affordability problems, they should be
targeted to intended recipients as accurately as possible, and they should be
designed to minimize their impact on productive behavior, such as labor force
participation. Premium increases, taxes, or fees necessary to finance subsidies
should be clearly identified to the public.
[58]